Citi Is Starting To Worry About Credit Cards

Credit card company stocks have had a monster year so far. Mastercard is up 52%. Visa is up 33%. American Express is up a more modest 7%, but it has certainly outperformed the KBW bank index which has plummeted 28% since the beginning of the year.

"While unemployment remains elevated, credit card issuers have enjoyed an extended period of improving credit metrics," said Citigroup analysts in a note to clients. Delinquencies have been declining and consumer spending has been up.

However, Citi thinks things are topping out for the credit card business.

"Cards have had a two year tail wind of improving credit but are now at an inflection point where the second derivative has turned. Delinquencies are improving at a slower rate and should flatten out for most issuers within a few months. We expect only two quarters of further reserve releases and JPM’s Q3 results highlight the reduced earnings contribution from credit improvement."

The note also points out that Citi's Chief Economist Wllem Buiter has been cutting his forecasts for global GDP growth. He currently see 3.0% growth for 2011 and 2.9% growth for 2012. The 2012 figure is down a full percentage point from four months ago.

Even worse, lending standards have come way down, which increases the risk of a spike in delinquencies.